BackHRD ministry finalizes credit guarantee scheme
The fund will provide default guarantees to banks in case a student fails to repay education loans
Premium(Mint)
New Delhi: The human resource development (HRD) ministry has completed the ground work for setting up two credit guarantee funds for study loans, a proposal that is expected to provide banks the much-needed cushion in offering these relatively high-risk debts.
The guarantee fund for higher education loans will have a corpus of ₹ 5,000 crore and that for vocational education will have a ₹ 2,500 crore backing, according to at least two HRD ministry officials.
“The guarantee will be provided to students wishing to pursue higher education inside the country. Those going abroad are not in the reckoning," said one of them, a senior HRD ministry official, requesting anonymity.
Higher education secretary Ashok Thakur confirmed the development and said the department of financial services is preparing a cabinet note.
The ministry officials said the corpus will remain static and any erosion in the funds may be replenished through a formal provision like a budgetary allocation.
Both the funds will provide default guarantees to banks in case a student fails to repay a loan.
Student loans are emerging as a new source of stress for banks as slowing economic growth hurts the employment prospects of new entrants into the job market, impairing their ability to service loans taken to fund their education, Mint reported on 20 November.
Indian banks had education loans of ₹ 53,500 crore outstanding in September, up from ₹ 48,300 crore a year ago. In the seven years ended March, banks’ education loan portfolio expanded at an average annual growth rate of 35% compared with 23% average annual growth rate of the industrial loan portfolio of the banks. About 6% of student loans outstanding as of 31 March, had turned bad, up from 2% in March 2008, the report said.
Though there are more than 2.4 million student loan accounts with different banks in the country, this figure is just around 10% of the total number of students eligible for taking study loans, according to official statistics.
“This would be a great relief for students as well as banks. We hope now the banks will not hesitate to lend to students in the pretext that such loans can go bad," said the unnamed HRD ministry official cited earlier.
There is a “perception that the education loan segment has a large amount of non-performing assets. Because of this it did not adequately meet the needs of the student community", said M. Narendra, chairman and managing director of state-run Indian Overseas Bank. “A credit guarantee fund will provide relief to banks and improve delivery at the branch level."
The funds will provide relief to students opting for loans of up to ₹ 7.5 lakh.
The HRD ministry officials said finance minister P. Chidambaram is supportive of the initiative and had taken it up with banks recently.
Chidambaram had said last week after his meeting with public sector bank chiefs that the government had finalized the contours of the credit guarantee fund for education loans but did not give details of it.
The guarantee fund for vocational education, more than the one for higher education, will be a game changer, said education experts.
Currently, banks don’t give loans to students pursuing vocational training courses though the central government has a mission to train about 500 million people by 2022 to take benefit of the much-touted demographic dividend. A fund to back any default in such loans will open the gate for students seeking skills training.
“The underprivileged who don’t have the skills, find it difficult to arrange even ₹ 20,000- ₹ 30,000 to enrol in vocational courses. A credit guarantee fund will be of immense importance. They can take loan, get skilled and pay back the loan as soon as they get a job. This way they will be more responsible," said Madhav Chavan, head of Pratham. The non-government organization has tied up with the National Skill Development Corporation to train 1.69 million youth in rural India.
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